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Block to sell CompuServe

Published on February 21, 1996.

H&R Block, which owns online service CompuServe, Columbus, Ohio, will spin off the service first by making a public offering of up to 20 percent of its stock early in second quarter of 1996. Throughout the rest of the year, the company will take other measures to redistribute its ownership in the service, including either a tax-free spin-off or split-off subject to IRS and other approvals.

H&R Block spent close to $70 million on efforts aimed at growing the consumer segments of CompuServe's online service, preparing a March launch for its second online service (currently code-named Project WOW!), and adjusting consumer access prices during fiscal 1996, which ends this April.

Robert Brown, president-CEO of H&R Block said in a teleconference that its board of directors had unanimously approved the decision to "create two new independent public companies" and that the spin-off was the "culmination of many months of ... initiatives to position CompuServe as a freestanding company in the online services market."

With a $70 million investment in those initiatives already placed, Block saw revenue decreases through the most recent reporting period ended Jan. 31. With monies from the offering, CompuServe would pay off its debt to Block and use the remaining profits for general operating expenses. At the time of the transaction, he said, CompuServe will be debt-free.

Director of interactive marketing Regina Brady said that CompuServe's fiscal year ends in April, so much of the $70 million allotted for fiscal 1996 had been spent. She wouldn't discuss whether the service's marketing budget would change for fiscal 1997.

Every time the flat tax came up, Block's stock took a hit, she said. Spinning off CompuServe will "allow both companies [H&R Block and CompuServe] to be valued" at their appropriate levels.

The move comes at an interesting time for CompuServe, which announced last fall an aggressive marketing campaign that would multiply direct-marketing efforts sixfold and use all traditional advertising media to reach consumers.

After naming Martin/Williams, Minneapolis, agency-of-record last summer, the service last month changed to DDB Needham, Chicago. A spokeswoman at the agency, now handling CompuServe's estimated $35 million business, was unaware until late this afternoon of the spin-off plans. "This is the first I've heard of it," she said.

Also, Cynthia A. Vahlkamp becomes Sr. VP-marketing, online services, CompuServe, from Quaker Oats where she led strategic relaunch of Pritikin Systems and served as general manager.